MELBOURNE, Sept 22 (Reuters) - Some banks have begun to pare back credit lines to smaller trading companies holding industrial metals in South Korea amid escalating tensions over North Korea’s nuclear and missile program, two industry sources said this week.

The banks are reducing their exposure on security concerns in the region. On Thursday, U.S. President Donald Trump and North Korean leader Kim Jong Un traded insults and the United States imposed stricter sanctions on the regime. This followed the launch of a second North Korean rocket over the Japanese island of Hokkaido on Friday.

“Australian banks are staying away as well as big U.S. banks. European banks are still ok. Some banks have reduced overall lines, but haven’t pulled out,” said a trader at a Singapore-based trading house.

The trader said that while the overall impact was not huge, some metals traders have been reshuffling the financing for their stockpiles from one bank to another.

The paring of the credit lines appears to be directed mainly at smaller trading firms with South Korean storage. Four sources at larger firms told Reuters this week that lenders were not pushing for them to reduce their risk exposure in the country.

Also, two metals traders said that banks have requested they add war insurance to their coverage.

The discount of cash copper prices to the three-month forward dropped on Monday to $52.25 a tonne, the most since December 2007 which sparked concerns that banks may be dumping copper into London Metal Exchange warehouses.

Copper stockpiles at LME warehouses in South Korea this month have surged by 50 percent showing that traders might have been cutting their exposure since the LME is a buyer of last resort.

But the discount has levelled off since Monday, narrowing to $40 a tonne on Friday, and two metals traders said that the spread blew out because of hefty Chilean deliveries and tepid consumer demand rather than reticence by banks to finance metal.

“Some of [our trade financiers] said that there is risk... and that they want to reduce our credit line or ask us to open war insurance,” said a trader at an Asian metals company. “But those banks have not actually forced us to reduce the volumes.”

Banks’ exposure to metals in South Korea comes in the form of credit lines supplied to holders of metal in LME-registered warehouses in Busan, Gwangyang and Incheon.

“A few months ago we were getting slightly uncomfortable with the situation in Korea and our banks were becoming a little bit uncomfortable with it,” Rene van der Kam, Managing Director at global commodities trader Viant Commodities, told a metals conference in Singapore last week. “We were worried enough to put some extra insurance in place.”